What is the Volatility Risk Premium (VRP)?

VRP is the difference between implied volatility and realized volatility (IV − RV). It represents the premium options sellers earn for taking on volatility risk. Positive VRP means IV > RV (options are expensive relative to actual movement); negative VRP means RV > IV (options are cheap).

How is VRP calculated?

Sharpe computes VRP using 1-month ATM IV from Deribit minus 1-month realized volatility from price history: VRP = IV_30d − RV_30d. The result is expressed in percentage points. We also compute an IV-RV Z-score that normalizes the spread against its historical distribution.

What is a normal VRP for crypto?

BTC VRP historically averages 3–8 percentage points positive. ETH VRP runs slightly wider (5–12 pts). Persistent VRP below 3 points signals cheap vol; above 15 points signals expensive vol. Extreme readings mean-revert within days to weeks.

How do I trade based on VRP?

High VRP (and IV-RV Z > +2) favors selling options — short strangles, iron condors, or covered call writing. Low or negative VRP (Z < −2) favors buying options — long straddles, long calls/puts, or variance swaps. Always size for maximum loss, not expected value — vol strategies work on average but have tail risk.

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Volatility Risk Premium (VRP) — Crypto Options